You will receive on credit if you only write down an answer don\'t show your wor

Question

You will receive on credit if you only write down an answer don't show your work The interest rate on treasury bills was 8.5% in 2011. If the inflation rate was 3.5% in 2011, what was the real rate of interest for 2011? You own a lease that will cost you $8,000 this year, increasing at 3.5% a year ^the forecasted inflation rate) for 3 additional years (with four payments in total). The lease payment will be made in the beginning of the year. If discount rates are 8.5% (nominal interest) what is the present value cost of the lease?

Explanation / Answer

Solution :

a..Real Interest rate =

(1 + nominal discount rate) ÷ (1+inflation rate) – 1

(1+.085) /(1+.035)   -   1

4.83%

b..

year

cash flow

Discount factot@8.5%

Present value

1

8,000.00

1

           8,000.00

2

8,280.00

0.921658986

           7,631.34

3

8,569.80

0.849455287

           7,279.66

4

8,869.74

0.782908098

           6,944.19

NPV

         29,855.19

a..Real Interest rate =

(1 + nominal discount rate) ÷ (1+inflation rate) – 1

(1+.085) /(1+.035)   -   1

4.83%

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